Germany: Public Hospitals are more efficient than Private Hospitals

Between 1992 to 2003, the share of public hospitals in Germany has decreased from 45% to 36%, while the proportion of for-profit hospitals rose from 15% to 25%. Is this a good thing?

The economic literature has mixed findings with respect to efficiency and ownership structure. In general, economic theory predicts that private ownership is superior to private ownership; with respect to hospital ownership, however, this is not always the case:

In his overview about non-profit ownership and hospital behaviour, Sloan (2000)…concludes that there is no clear empirical evidence for a difference between these two ownership types. Duggan (2000) uses a change in financing US hospitals to reveal that the difference between the three types is driven by the soft budget constraint of public hospitals.

Other papers such as Brown (2003) find that non-profit hospitals are the most technically efficient while Farsi and Fillippini fund no difference in cost efficiency by hospital ownership in Switzerland.

Using data from the Statistical Offices of the Länder from 2000 to 2003, Annika Herr (2008) compares the cost and technical efficiency of three types of German hospitals: public and for-profit private, and non-profit private. To make a fair comparison between hospitals, cases are weighted by their severity. Severity is measured by the diagnosis (ICD-10) and the length of hospital stay.

Dr. Herr’s main finding is that “both private and non-profit hospitals are less efficient than public hospitals in Germany.” One of the reasons is that private hospitals were paid a per diem rate, thus increasing the hospitals incentive to increase the hospital length of stay. In 2004, capitation payments were introduced for hospital admissions so this may reduce some of the efficiency difference.

One major issue with this paper–and much of health of health economics–is that it ignores hospital quality. Once we take into account quality, then it is possible that private hospitals may out-preform public hospitals with respect to efficiency. It is also possible that private hospitals may have amenities (e.g., single rooms, newer facilities) that patients value, but do not directly affect their health. On the other hand, private hospitals could be more susceptible to supplier-induced-demand under a per diem reimbursement scheme which could further exacerbate the efficiency differences between public and private hospitals.

Another interesting item to note, Herr does mention that Augurzky et al. (2004) found that in Germany, “public hospitals face a much higher risk of insolvency and closure.”

  • Annika Herr (2008) “Cost and technical efficiency of German hospitals: does ownership matter?” Health Economics, Volume 17 Issue 9, Pages 1057 – 1071
  • Sloan FA. 2000. Not-for-profit Ownership and Hospital Behavior. In Handbook of Health Economics 1B, Culyer AJ , Newhouse JP (eds), Chapter 21. Elsevier: Amsterdam, 1141-1174.
  • Duggan MG. 2000. Hospital ownership and public medical spending. The Quarterly Journal of Economics 115: 1343-1373
  • Brown SIII. 2003. Managed care and technical efficiency. Health Economics 12(2): 149-158.
  • Farsi M, Filippini M. 2006. An analysis of efficiency and productivity in Swiss hospitals. Schweizerische Zeitschrift für Volkswirtschaft und Statistik 142(1): 1-37.
  • Augurzky B, Engel D, Krolop S, Schmidt CM, Terkatz S. 2004. Insolvenzrisiken von Krankenhäusern – Bewertung und Transparenz unter Basel II. Materialien 15, Rheinisch Westfälisches Institut für Wirtschaftsforschung.